Last updated on February 6th, 2023

With group medical plan coverage costs projected to increase between 5% and 6% next year, employers are in a tough spot. Keep offering this valuable coverage and absorbing big cost increases as part of their overall recruitment, retention, and engagement efforts, or consider an alternative that’s growing in popularity: Individual Coverage Health Reimbursement Accounts (ICHRAs).

ICHRAs came into being in 2020 and allow employers to reimburse employees with tax-free dollars for some or all the cost of medical insurance they purchase on their own, as well as certain out-of-pocket costs like copayments and deductibles. They are similar to a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) introduced in 2017 but offer more flexibility and features.   Here are some highlights:

• The employer decides how much to contribute to the ICHRA. As long as that amount is considered “affordable”, an employer will meet any Affordable Care Act coverage mandate that applies.
• A covered employee purchases his/her own coverage – inside the Marketplace or out – and gets reimbursed with ICHRA funds to offset some or all of the monthly premiums (depending on how much the employer contributes). This enables the employee to decide which plan has the benefits (i.e., prescription drug), network doctors, and other features that are meaningful to him/her. Employers can also contribute funds to help cover out-of-pocket costs.
• If an employee chooses to purchase a plan outside of the ACA Marketplace, the employer can offer him/her the option to pay any premium amounts above the employer’s ICHRA contribution using tax-free dollars via a cafeteria plan.
• ICHRA reimbursements are tax-deductible for employers and tax-free for employees. So instead of paying payroll taxes on reimbursements given, the reimbursements qualify as an employer tax deduction. In addition, reimbursements are not considered taxable income to employees.

As a result, employees are given the flexibility to choose the coverage that best meets their cost and healthcare needs. Employers can get out of the resource-intensive business of managing, negotiating, and paying directly for group medical plan coverage. Plus, they can manage costs better than ever because they set the limit on how much they’ll contribute to an ICHRA.

ICHRAs also offer a lot of flexibility to employers. For example, an employer can choose which classes of employees are eligible for the ICHRA, while still offering a group medical plan to others. So, an employer may decide to offer an ICHRA to employees in New York, but not Ohio; to full-time employees, but not part-time; etc. An employer can even decide to offer the ICHRA as the only medical plan option to all new hires (a good way to transition away from group medical plan sponsorship over time).

With ICHRAs, small businesses that couldn’t afford to offer traditional coverage now have an option that can strengthen their ability to attract and retain employees. Businesses that already offer medical plan coverage may decide an ICHRA may be a better fit for certain employee classes. All employers may view it as a viable alternative to taking on the risk of managing, negotiating with, and paying for group medical plan coverage.

According to ICHRA FAQs issued jointly by the U.S. Department of Treasury, the U.S. Department of Labor, and the U.S. Department of Health and Human Services, it is projected that “in the next 5-10 years, roughly 800,000 employers will offer Individual Coverage HRAs to pay for insurance for more than 11 million employees.”

Still, there are a lot of technicalities that need to be worked through if you’re considering making the move. For example, employees must choose between the ICHRA and health premium tax credit through the ACA Marketplace. Also, small employers must choose between an ICHRA or Small Business Healthcare Tax Credit – they can’t have both.

For more information, review Healthcare.gov’s ICHRA Decision Guide; Takecommandhealth.com’s guide; and Healthinsurance.org’s ICHRA overview.

Interested in learning more? RBT CPA affiliate Visions Human Resource Services staff is available to conduct benefit plan analysis, while RBT CPAs can help you understand the tax implications of choosing an ICHRA versus other options. Give us a call if you have any questions about this or anything related to your accounting, tax, audit, and business advisory needs. We’ve been serving businesses in the Hudson Valley for over 50 years and believe we succeed when we help you succeed. Call RBT CPAs today.